March 22, 2007
Budget mocks conservative principles
Niels Veldhuis and Jason Clemens, The StarPhoenix
The following viewpoint was prepared by Veldhuis, senior economist with the Fraser Institute in Vancouver, and Clemens, director of fiscal studies at the institute.
The budget delivered Monday by Finance Minister Jim Flaherty was conservative in name only. It increases the size and scope of activity undertaken by the federal government and relies largely on a host of activist economic policies rather than focus on creating the right environment to encourage economic activity.
The budget plan calls for program spending to increase to $199.6 billion in 2007-08. That's an increase of $10.7 billion from the 2006-07 budget and comes after a $13.8-billion increase in program spending implemented last year.
What's more, the increases were initiated by a government that made a commitment to constrain its program spending increases to the rate of growth of the population and inflation.
The most important gauge of the breadth and depth of government activity is to measure its spending as a share of the economy. The share of the economy represented by federal program spending will increase to 13.3 per cent in 2007-08 from 12.8 per cent a year earlier.
Ottawa is increasing its size rather than reducing it at a time of relative economic strength. An economic downturn or slowdown could mean a more pronounced increase in the size of the federal government.
Two areas that highlight the budget's policy approach are the fiscal balance and tax relief.
The centerpiece of the budget was a $39-billion increase in transfers to the provinces over the next seven years, to deal with the fiscal balance between Ottawa and the provinces. It includes a significant increase in equalization and the Canada Social Transfer (used for post-secondary and social services) along with new transfers for labour market training, infrastructure, and climate change.
Flaherty boldly declared: "The long, tiring, unproductive era of bickering between the provincial and federal governments is over."
Unfortunately, true to history, the bickering and demands resumed shortly after. It's much easier for the provinces to constantly demand more from Ottawa while hiding behind federal mandates such as the principles enshrined in the Canada Health Act.
Although the feds have increased cash transfers to the provinces for health care by $36 billion since 1997, that hasn't stopped the provinces from demanding ever greater sums from Ottawa.
More importantly, the increased transfer of cash has not resulted in better access to medical care. Waiting times for health care in Canada are nearly 50 per cent longer than they were in 1997 and access to technologies such as MRIs and CT scanners have also decreased.
A conservative approach to fixing the fiscal balance would have seen Ottawa remove itself from these areas, which it readily admits are exclusively provincial responsibility. In other words, the feds should have eliminated transfers, reduced federal taxes and allowed the provinces to increase their own taxes.
This clarifies the role of governments in the minds of citizens since those raising the revenues are also those responsible for providing services.
This so-called conservative government chose instead to follow the tried and tested path of simply increasing the amount of transfers.
Equally as telling were the tax relief measures in the budget. Overall tax cuts played a relatively small part in the budget -- for every $1 of tax relief, spending was increased by nearly $2.50.
environment for individuals and businesses to flourish was near absent save for a few measures, which are important but were the exception rather than the rule in this budget.
The budget should have included personal and business income tax rate reductions. Activist economic policies that increase the size and scope of government have failed Canada in the past. Unfortunately for Canadians, the "New" federal government took a page from the previous Liberal government.
That is, rather than focus on creating the right conditions under which all Canadians can prosper, Monday's budget resorted to picking winners and losers. And that's a mug's game.
More revealing than the spend-tax relief gap is the lack of broad-based tax relief. The government chose instead to pick winners -- if you're a trucker, a manufacturer, energy company, fisherman, farmer, purchaser of a hybrid vehicle, and/or senior -- then you may have benefited from the budget.
For average Canadians, particularly those without children, there wasn't any broad-based tax relief. The type of broad-based tax relief characteristic of an economic approach focusing on creating the right economic